Solution manual cost accounting 14e by horngren chapter 15

CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS, COMMON COSTS, AND REVENUES 15-1 The single-rate cost-allocation method makes no distinction between fixed costs and variable costs in

CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS,

COMMON COSTS, AND REVENUES

15-1 The single-rate (cost-allocation) method makes no distinction between fixed costs and variable costs in the cost pool It allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base The dual-rate (cost-allocation) method classifies costs

in each cost pool into two pools—a variable-cost pool and a fixed-cost pool—with each pool using a different cost-allocation base

15-2 The dual-rate method provides information to division managers about cost behavior

Knowing how fixed costs and variable costs behave differently is useful in decision making

15-3 Budgeted cost rates motivate the manager of the support department to improve

efficiency because the support department bears the risk of any unfavorable cost variances

15-4 Examples of bases used to allocate support department cost pools to operating departments include the number of employees, square feet of space, number of direct labor hours, and machine-hours

15-5 The use of budgeted indirect cost allocation rates rather than actual indirect rates has several attractive features to the manager of a user department:

a the user knows the costs in advance and can factor them into ongoing operating choices,

b the cost allocated to a particular user department does not depend on the amount of resources used by other user departments, and

c inefficiencies at the department providing the service do not affect the costs allocated

to the user department

15-6 Disagree Allocating costs on ―the basis of estimated long-run use by user department

managers‖ means department managers can lower their cost allocations by deliberately underestimating their long-run use (assuming all other managers do not similarly underestimate their usage)

15-7 The three methods differ in how they recognize reciprocal services among support departments:

a The direct (allocation) method ignores any services rendered by one support department to another; it allocates each support department’s costs directly to the operating departments

b The step-down (allocation) method allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments

c The reciprocal (allocation) method allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments

15-8 The reciprocal method is theoretically the most defensible method because it fully recognizes the mutual services provided among all departments, irrespective of whether those

departments are operating or support departments

15-9 The stand-alone cost-allocation method uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights

The incremental cost-allocation method ranks the individual users of a cost object in the order of users most responsible for the common costs and then uses this ranking to allocate costs among those users The first-ranked user of the cost object is the primary user and is allocated costs up to the costs of the primary user as a stand-alone user The second-ranked user is the first incremental user and is allocated the additional cost that arises from two users instead of only the primary user The third-ranked user is the second incremental user and is allocated the additional cost that arises from three users instead of two users, and so on

The Shapley Value method calculates an average cost based on the costs allocated to each user as first the primary user, the second-ranked user, the third-ranked user, and so on

15-10 All contracts with U.S government agencies must comply with cost accounting standards

issued by the Cost Accounting Standards Board (CASB)

15-11 Areas of dispute between contracting parties can be reduced by making the ―rules of the

game‖ explicit and in writing at the time the contract is signed

15-12 Companies increasingly are selling packages of products or services for a single price

Revenue allocation is required when managers in charge of developing or marketing individual products in a bundle are evaluated using product-specific revenues

15-13 The stand-alone revenue-allocation method uses product-specific information on the

products in the bundle as weights for allocating the bundled revenues to the individual products

The incremental revenue allocation method ranks individual products in a bundle according to criteria determined by management—such as the product in the bundle with the most sales—and then uses this ranking to allocate bundled revenues to the individual products The first-ranked product is the primary product in the bundle The second-ranked product is the first incremental product, the third-ranked product is the second incremental product, and so on

15-14 Managers typically will argue that their individual product is the prime reason why

consumers buy a bundle of products Evidence on this argument could come from the sales of the

products when sold as individual products Other pieces of evidence include surveys of users of

each product and surveys of people who purchase the bundle of products

15-15 A dispute over allocation of revenues of a bundled product could be resolved by (a)

having an agreement that outlines the preferred method in the case of a dispute, or (b) having a third party (such as the company president or an independent arbitrator) make a decision

15-16 (20 min.) Single-rate versus dual-rate methods, support department

Bases available (kilowatt hours):

Rockford Peoria Hammond Kankakee Total

Practical capacity

Expected monthly usage

10,000 8,000

20,000 9,000

12,000 7,000

8,000 6,000

50,000 30,000 1a Single-rate method based on practical capacity:

Total costs in pool = $6,000 + $9,000 = $15,000

Practical capacity = 50,000 kilowatt hours

Allocation rate = $15,000 ÷ 50,000 = $0.30 per hour of capacity

Rockford Peoria Hammond Kankakee Total

Practical capacity in hours

Costs allocated at $0.30 per hour

Total costs in pool = $6,000 + $9,000 = $15,000

Expected usage = 30,000 kilowatt hours

Allocation rate = $15,000 ÷ 30,000 = $0.50 per hour of expected usage

Rockford Peoria Hammond Kankakee Total

Expected monthly usage in hours

Costs allocated at $0.50 per hour

Total costs in pool = $9,000 Practical capacity = 50,000 kilowatt hours Allocation rate = $9,000 ÷ 50,000 = $0.18 per hour of capacity

$3,400

$1,800 3,600

$5,400

$1,400 2,160

$3,560

$1,200 1,440

$2,640

$ 6,000 9,000

$15,000 The dual-rate method permits a more refined allocation of the power department costs; it permits the use of different allocation bases for different cost pools The fixed costs result from decisions most likely associated with the scale of the facility, or the practical capacity level The variable

costs result from decisions most likely associated with monthly usage

15-17 (20–25 min.) Single-rate method, budgeted versus actual costs and quantities

1 a Budgeted rate = Budgeted indirect costs

Budgeted trips = $115,000/50 trips = $2,300 per round-trip Indirect costs allocated to Dark C Division = $2,300 per round-trip 30 budgeted round trips

= $69,000 Indirect costs allocated to Milk C Division = $2,300 per round-trip 20 budgeted round trips

= $46,000

b Budgeted rate = $2,300 per round-trip

Indirect costs allocated to Dark C Division = $2,300 per round-trip 30 actual round trips

= $69,000 Indirect costs allocated to Milk C Division = $2,300 per round-trip 15 actual round trips

= $34,500

c Actual rate = Actual indirect costs

Actual trips = $96,750/ 45 trips = $2,150 per round-trip

Indirect costs allocated to Dark C Division = $2,150 per round-trip 30 actual round trips

When budgeted rates/actual quantities are used, the Dark Chocolate and Milk Chocolate Divisions know at the start of 2012 that they will be charged a rate of $2,300 per round trip, i.e., they know the price per unit of this resource This enables them to make operating decisions knowing the rate they will have to pay for transportation Each can still control its total transportation costs by minimizing the number of round trips it uses Assuming that the budgeted rate was based on honest estimates of their annual usage, this method will also provide an estimate of the excess trucking capacity (the portion of fleet costs not charged to either division)

In contrast, when actual costs/actual quantities are used, the two divisions must wait until end to know their transportation charges

year-The use of actual costs/actual quantities makes the costs allocated to one division a function of the actual demand of other users In 2012, the actual usage was 45 trips, which is 5 trips below the 50 trips budgeted The Dark Chocolate Division used all the 30 trips it had budgeted The Milk Chocolate Division used only 15 of the 20 trips budgeted When costs are allocated based on actual costs and actual quantities, the same fixed costs are spread over fewer

trips resulting in a higher rate than if the Milk Chocolate Division had used its budgeted 20 trips

As a result, the Dark Chocolate Division bears a proportionately higher share of the fixed costs

Using actual costs/actual rates also means that any efficiencies or inefficiencies of the trucking fleet get passed along to the user divisions In general, this will have the effect of making the truck fleet less careful about its costs, although in 2012, it appears to have managed its costs well, leading to a lower actual cost per roundtrip relative to the budgeted cost per round trip

For the reasons stated above, of the three single-rate methods suggested in this problem, the budgeted rate and actual quantity may be the best one to use (The management of Chocolat would have to ensure that the managers of the Dark Chocolate and Milk Chocolate divisions do not systematically overestimate their budgeted use of the fleet division in an effort to drive down the budgeted rate)

15-18 (20 min.) Dual-rate method, budgeted versus actual costs, and practical capacity versus actual quantities (continuation of 15-17)

1 Charges with dual rate method

Variable indirect cost rate = $1,350 per trip

Fixed indirect cost rate = $47,500 budgeted costs/ 50 round trips budgeted

= $950 per trip Dark Chocolate Division

Variable indirect costs, $1,350 × 30 $40,500

Fixed indirect costs, $950 × 30 28,500

$69,000 Milk Chocolate Division

Variable indirect costs, $1,350 × 15 $20,250

Fixed indirect costs, $950 × 20 19,000

$39,250

2 The dual rate changes how the fixed indirect cost component is treated By using budgeted trips made, the Dark Chocolate Division is unaffected by changes from its own budgeted usage or that of other divisions When budgeted rates and actual trips are used for allocation (see requirement 1.b of problem 15-17), the Dark Chocolate Division is assigned the same $28,500 for fixed costs as under the dual-rate method because it made the same number of trips as budgeted However, note that the Milk Chocolate Division is allocated $19,000 in fixed trucking costs under the dual-rate system, compared to $950 15 actual trips = $14,250 when actual trips are used for allocation As such, the Dark Chocolate Division is not made to appear disproportionately more expensive than the Milk Chocolate Division simply because the latter did not make the number of trips it budgeted at the start of the year

15-19 (30 min.) Support department cost allocation; direct and step-down methods

c Step-down (IS first) costs $600,000 $2,400,000

Alloc of IS costs (0.10, 0.30, 0.60) 240,000 (2,400,000)$ 720,000 $1,440,000 Alloc of AS costs

$ 0 $ 0 $1,168,000 $1,832,000

The direct method ignores any services to other support departments The step-down method

partially recognizes services to other support departments The information systems support

group (with total budget of $2,400,000) provides 10% of its services to the AS group The AS

support group (with total budget of $600,000) provides 25% of its services to the information

systems support group When the AS group is allocated first, a total of $2,550,000 is then

assigned out from the IS group Given CORP’s disproportionate (2:1) usage of the services of

IS, this method then results in the highest overall allocation of costs to CORP By contrast,

GOVT’s usage of the AS group exceeds that of CORP (by a ratio of 8:7), and so GOVT is

assigned relatively more in support costs when AS costs are assigned second, after they have

already been incremented by the AS share of IS costs as well

3 Three criteria that could determine the sequence in the step-down method are:

a Allocate support departments on a ranking of the percentage of their total services provided to other support departments

c Allocate support departments on a ranking of the dollar amounts of service provided

to other support departments

15-20 (50 min.) Support-department cost allocation, reciprocal method (continuation of 15-19)

AS = $600,000 + 0.10 IS

IS = $2,400,000 + 0.25AS

IS = $2,400,000 + 0.25 ($600,000 + 0.10 IS) = $2,400,000 + $150,000 + 0.025 IS 0.975IS = $2,550,000

IS = $2,550,000 ÷ 0.975 = $2,615,385

AS = $600,000 + 0.10 ($2,615,385) = $600,000 + $261,538

c Step-Down (IS first) 1,168,000 1,832,080

The four methods differ in the level of support department cost allocation across support departments The level of reciprocal service by support departments is material Administrative Services supplies 25% of its services to Information Systems Information Systems supplies 10%

of its services to Administrative Services The Information Department has a budget of $2,400,000 that is 400% higher than Administrative Services

The reciprocal method recognizes all the interactions and is thus the most accurate This is especially clear from looking at the repeated iterations calculations

15-21 (40 min.) Direct and step-down allocation

1

2 Rank on percentage of services rendered to other support departments

Step 1: HR provides 23.077% of its services to information systems:

212842

21

= 91

21 = 23.077%

This 23.077% of $72,700 HR department costs is $16,777

Step 2: Information systems provides 8.333% of its services to HR:

320600,1920,1

320

= 840,3

320 = 8.333%

This 8.333% of $234,400 information systems department costs is $19,533

Alloc of HR costs

(21/91, 42/91, 28/91) (72,700) 16,777 33,554 22,369

$ 0 251,177 Alloc of Info Syst costs

(1,920/3,520, 1,600/3,520) (251,177) 137,006 114,171

$ 0 $1,168,830 $626,400 $1,795,230

3 An alternative ranking is based on the dollar amount of services rendered to other support departments Using numbers from requirement 2, this approach would use the following sequence:

Step 1: Allocate Information Systems first ($19 533 provided to HR)

Step 2: Allocate HR second ($16 777 provided to Information Systems)

15-22 (30 min.) Reciprocal cost allocation (continuation of 15-21)

1 The reciprocal allocation method explicitly includes the mutual services provided among all support departments Interdepartmental relationships are fully incorporated into the support department cost allocations

Costs Incurred $72,700 $234,400 $ 998,270 $489,860 $1,795,230 Alloc of HR costs

SOLUTION EXHIBIT 15-22

Reciprocal Method of Allocating Support Department Costs for September 2012 at

E-books Using Repeated Iterations

Support Departments Operating Departments Human

Resources

Information Systems

Corporate Sales

Consumer Sales Total

Budgeted manufacturing overhead costs

A summary of the alternatives is:

Corporate Sales Consumer Sales

15-23 (20 25 min.) Allocation of common costs

1 Three methods of allocating the $55 are:

Stand-alone Incremental (Gary primary) Incremental (Ben primary) Shapley value

b Incremental cost allocation method

Assume Gary (the owner) is the primary user and Ben is the incremental user:

User

Costs Allocated

Cumulative Costs Allocated

Gary Ben Total

Assume Ben is the primary user and Gary is the incremental user:

User

Costs Allocated

Cumulative Costs Allocated

Ben Gary Total

c Shapley value (average over costs allocated as the primary and incremental user)

User

Costs Allocated

Ben Gary

($50 + $60) 2 = $55 ($15 + $5) 2 = $10

2 The Shapley value approach is recommended It is fairer than the incremental method because it avoids considering one user as the primary user and allocating more of the common costs to that user It also avoids disputes about who is the primary user It allocates costs in a manner that is close to the costs allocated under the stand-alone method but takes a more comprehensive view of the common cost allocation problem by considering primary and incremental users that the stand-alone method ignores

More generally, other criteria to guide common cost allocations include the following:

a Cause and effect It is not possible to trace individual causes (either Internet access or phone services) to individual effects (uses by Ben or Gary) The $65 total package is

a bundled product

b Benefits received There are various ways of operationalizing the benefits received:

(i) Monthly service charge for their prime interest––Internet access for Ben ($60), and phone services for Gary ($15) This measure captures the services available to each person

(ii) Actual usage by each person This would involve keeping a record of usage by each person and then allocating the $65 on a percent usage time basis This measure captures the services actually used by each person, but it may prove burdensome and it would be subject to honest reporting by Ben and Gary

c Ability to pay This criterion requires that Ben and Gary agree upon their relative

ability to pay

d Fairness or equity This criterion is relatively nebulous One approach would be to split the $65 equally among the two users

15-24 (20 min.) Allocation of common costs

1 Alternative approaches for the allocation of the $1,600 airfare include the following:

a The stand-alone cost allocation method This method would allocate the air fare on the basis of each client’s percentage of the total of the individual stand-alone costs

b The incremental cost allocation method This requires the choice of a primary party and an incremental party

If the Baltimore client is the primary party, the allocation would be:

$1,600 One rationale is that Gunn was planning to make the Baltimore trip, and the Chicago stop was added subsequently Some students have suggested allocating as much as possible to the Baltimore client since Gunn had decided not to work for them

If the Chicago client is the primary party, the allocation would be:

$600 to the Chicago client

2 Gunn should use the Shapley value method It is fairer than the incremental method because it avoids considering one party as the primary party and allocating more of the common costs to that party It also avoids disputes about who is the primary party It allocates costs in a

comprehensive view of the common cost allocation problem by considering primary and

incremental users, which the stand-alone method ignores

The Shapley value (or the stand-alone cost allocation method) would be the preferred

methods if Gunn was to send the travel expenses to the Baltimore and Chicago clients before

deciding which engagement to accept Other factors such as whether to charge the Chicago client more because Gunn is accepting the Chicago engagement or the Baltimore client more because

Gunn is not going to work for them can be considered if Gunn sends in her travel expenses after

making her decision However, each company would not want to be considered as the primary

party and so is likely to object to these arguments

3 A simple approach is to split the $80 equally between the two clients The limousine

costs at the Sacramento end are not a function of distance traveled on the plane

An alternative approach is to add the $80 to the $1,600 and repeat requirement 1:

a Stand-alone cost allocation method

Baltimore client $1, 280

$1, 280 $880 $1,680 = $995.56

$1, 280 $880 $1,680 = $684.46

b Incremental cost allocation method

With Baltimore client as the primary party:

As discussed in requirement 2, the Shapley value or the stand-alone cost allocation

method would be the preferred approaches

Note: If any students in the class have faced this situation when visiting prospective employers,

ask them how they handled it

15-25 (20 min.) Revenue allocation, bundled products

1a Under the stand alone revenue-allocation method based on selling price, Monaco will be allocated 30% of all revenues, or $39 of the bundled selling price, and Innocence will be allocated 70% of all revenues, or $91 of the bundled selling price, as shown below

Stand-alone method, based on selling

Incremental Method (Monaco rank 1) Monaco Innocence

Incremental Method (Innocence rank 1) Monaco Innocence

Shapley Value Method Monaco Innocence

Allocation when Monaco = Rank 1;

Allocation when Innocence = Rank 1;

Average of allocated selling price ($48 + $18) 2; ($82 + $112) 2 $33 $ 97

2 A summary of the allocations based on the four methods in requirement 1 is shown below

Stand-alone (Selling Prices)

Incremental (Monaco first)

Incremental (Innocence first) Shapley

If there is no clear indication of which product is the more ―important‖ product, or, if it can be reasonably assumed that the two products are equally important to the company's strategy, the Shapley value method is the fairest of all the methods because it averages the effect of product rank In this particular case, note that the allocations from the stand-alone method based on selling price are reasonably similar to the allocations from the Shapley value method, so the managers at Yves may well want to use the much simpler stand-alone method The stand-alone method also does not require ranking the products in the suite, and so it is less likely to cause debates among product managers in the Men's and Women's Fragrance divisions If, however, one of the products (Monaco or Innocence) is clearly the product that is driving sales of the bundled product, then that product should be considered the primary product

15-26 (20-25 min ) Allocation of Common Costs

1 a Dandridge’s method based on number of cars sold:

Sales

Location

Number of cars sold Percentage

Joint Cost Allocation

Percentage (costs in thousands)

Joint Cost Allocation

of the advertising cost is for new car sales and not used car sales (the majority of the East location’s business) then Dandridge’s method of allocating costs based on number of cars sold would be particularly unfair to East, which would pay $630,000 of the $1,800,000 in total advertising cost Dandridge could alternatively separate the total $1,800,000 of advertising cost into two cost pools: one for new car advertising and one for used car advertising and allocate on the basis of new cars sold and used cars sold, to make this method more equitable to the various sales locations

15-27 (20 min.) Single-rate, dual-rate, and practical capacity allocation

Budgeted number of gifts wrapped = 6,650

Budgeted fixed costs = $6,650

Fixed cost per gift based on budgeted volume = $6,650 ÷ 6,650 =$1.00

Average budgeted variable cost per gift = 0.40

1.a Allocation based on budgeted usage of gift-wrapping services:

Hair Products (1,120 × $1.40) 1,568

1.b Allocation based on actual usage of gift-wrapping services:

1.c Practical gift-wrapping capacity = 7,000

Budgeted fixed costs = $6,650

Fixed cost per gift based on practical capacity = $6,650 ÷ 7,000 = $0.95 Average budgeted variable cost per gift = 0.40

Allocation based on actual usage of gift-wrapping services:

Women’s Face Wash (2,020 × $1.35) $2,727.00

Men’s Face Wash (730 × $1.35) 985.50

Hair Products (1,495 × $1.35) 2,018.25

2 Budgeted rate for fixed costs = Budgeted fixed costs

Practical capacity

= $6,650 ÷ 7,000 gifts = $0.95 per gift Fixed costs allocated on budgeted usage

Rate for variable costs = $0.40 per item

Variable costs based on actual usage

Allocation:

Women’s Face Wash 2,020 × $0.40 = $ 808.00

2,470 × $0.95 =

$2,346.50 $3,154.50 Men’s Face Wash 730 × $0.40 = 292.00

825 × $0.95 =

783.75 1,075.75 Fragrances 1,560 × $0.40 = 624.00

1,805 × $0.95 =

1,714.75 2,338.75 Body Wash 545 × $0.40 = 218.00

430 × $0.95 =

408.50 626.50 Hair Products 1 ,495 × $0.40 = 598.00

1,120 × $0.95 =

1,064.00 1,662.00

3 The dual-rate method has two major advantages over the single-rate method:

a Fixed costs and variable costs can be allocated differently—fixed costs based on rates calculated using practical capacity and budgeted usage, and variable costs based on budgeted rates and actual usage

b Fixed costs are allocated proportionately to the departments causing the incurrence of those costs based on the capacity of each department

c The costs allocated to a department are not affected by the usage by other departments

Note: If capacity costs are the result of a long-term decision by top management, it may

be desirable to allocate to each department the cost of capacity used based on actual usage The users are then not allocated the costs of unused capacity